I get a lot of emails from people who pose some variation of the question about what steps they should take now that they find themselves behind in mortgage payments and unable to bring themselves current or manage the increased monthly payments associated with an adjusting adjustable rate mortgage. A lot of them inquire about short sales as a possibility to get out of their home and want to know how the short sale process works.

Unfortunately there isn’t a lot of good information out there for people who are looking at short sales as an option for getting out of a bad mortgage situation. There are plenty of books about making money buying short sale properties; but there is little in print about the pros and cons for home owners who are considering the emotionally and financially difficult situation.

According to Jim Woodall, a short-sale expert in San Diego, CA short sales, while each unique for the family, typically fall in to three buckets or types.  Before you decide to choose a short sale as the right option for you I recommend you talk to some one like Jim who can walk you through the process to see how you benefit.  You can also listen to the highly informative podcast we did about short sales.

The Three Buckets of Short Sales:

1. Purchase Money Only - If you bought your home at the top of the market and have never refinanced your home or added a home equity line of credit or second mortgage this is your bucket.  If you’ve decided to short sale due to declining market values in your area you are in the best position to short sale your home.  Why?  Purchase money loans are non-recourse.  Non-recourse means that the bank’s only resource for the money that you borrowed is the home itself.  Nothing else.  This is by far the best bucket to be in.
2. Refinanced with One Loan - If you have refinanced your home since you purchased it and have borrowed against your home equity; but still kept just one loan, you are in bucket number two.  All refinance loans are recourse loans which means that banks can seek additional recourse for the money they lose when you short sale your home.  They can go after your additional assets to seek compensation for the money you borrowed and are now not planning on paying back.  Luckily for people with one loan the bank is willing to take a certain loss on properties (specific to each home) and will not seek recourse for the additional money because the legal fees and time challenges make that an unattractive option.  Most banks will accept the short sale as the only recourse (even if they are legally entitled to pursue additional channels).
3. Refinanced with Two Loans - If you refinanced and borrowed against your home equity by using a new first mortgage and a second (or junior) mortgage such as a home equity line of credit of fixed second you are in the third bucket.  When you consider a short sale with two loans you are asking the second loan holder to take a 100% loss on their loan to you.  Second loans are recourse loans; and these second lien holders can pursue additional recourse for the money loaned to you.  This means that even if your first mortgage holder approves the short sale, the second mortgage holder may not or may come after you for the balance of your second mortgage.  This third bucket is the most difficult bucket to be in to complete a short sale.

In future posts we’ll talk about the steps you need to take if you are considering a short sale on your home; but first, you must identify the bucket you are in to get a feel for your prospects in completing a shot sale to your benefit.  As you can already tell bucket number 3 is not the place to be when considering a short sale as an option out of your property.

If you want to learn more now, listen to our short sale podcast with Jim Woodall; and if you’re in San Diego be sure to contact Jim directly.

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President Bush and Secretary of the Treasury Hank Paulson unveiled the government’s ARM freeze proposal today; a measure which could help up to 1.2 million families at risk of foreclosure.  Unfortunately, some private groups have set the number of families that qualify at 145,000 due to overly-restrictive qualification guidelines.  The plan calls for a 5 year freeze on adjustable rate mortgage and is available for people who:

• Have an adjustable rate mortgage that is set to adjust between January 1, 2008 and July 31, 2010.  ARM loans set to adjust before or after that time period are ineligible.
• Have made all of their payments at the low “teaser” rate in a timely manner.
• Have the ARM loan on their primary residence.
• Have a 660 FICO score or below (higher-score ARM-holders are still eligible but will be second priority)
• You hold a 2-year fixed ARM (2/28) or a 3-year fixed ARM (3/27)

For more on the ARM freeze read the great posts on it by thetruthaboutmortgage.com and housingwire.com; news coverage here and here.

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Filed under: eBay (EBAY), Stocks to Buy

Liquidity Services (NASDAQ: LQDT) operates online marketplaces for wholesale, surplus and salvage assets (the websites include www.liquidation.com, www.govliquidation.com, www.liquibiz.com and www.goWholesale.com). It’s certainly a good business as seen with the fiscal Q4 results.

Revenues increased 30% to $51.7 million, and adjusted EBITDA increased 43% to $5.8 million.

The marketplaces for Liquidity Services are certainly getting lots of traction. For example, there are on average five auction participants per completed transaction (for the year). As seen with eBay (NASDAQ: EBAY), getting qualified buyers is key for growth.

Going into 2008, the company is looking to ramp up volume customers as well as add more services. In fact, the sluggish economy may be a benefit for Liquidity Services, since companies are trying to cut costs.

For Q1, the company expects to post adjusted earnings of 11 cents. And for 2008, the earnings are forecast at 53 cents to 55 cents.

In today’s trading, the shares of Liquidity Services are up 27% to $14.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: Earnings reports, Good news, Trina Solar ADS (TSL)

Solar energy products company Trina Solar Limited (NYSE: TSL) released very bright 3Q 2007 results on November 21. The company has been named #1 on Deloitte Technology China Fast 50. Trina Solar posted a total revenue increase of 9.7% to $82.6 million. Gross profit increased 16.7% and total megawatt shipments increased 4%. YTD, the numbers are impressive. Total revenues are up 164%, gross profit is up 92%, operating income is up 76% and net income is up 145%.

These numbers, however, must be tempered with the realization that trina Solar is still very much in its early stages of growth and most of its free cash flowe must be plowed back into the company to increase manufacturing capacity. Operating income dipped 14% in 3Q 2007, cost of revenues increased 8%, interest expense increased, as did operating expenses, administrative expenses, selling expenses and the R & D budget.

Currently, Trina Solar has a manufacturing capacity of 150 MW (megawatts) of solar modules, but plans to double the size of the company to 350 MW by the end of 2008. Trina Solar has already locked in contracts for much of its polysilicon supplies through 2013, and has already sold 100% of its first module production capacity in 2008 and 50% of its second module production capacity.

Trina Solar is in the initial stages of planning for its own $1 billion polysilicon production facility to supply its raw material needs in a cost effective manner. In addition to its existing client base in Germany, Italy and Spain, with its increased production capacity, Trina Solar is looking to expand its market base into the Netherlands, Belgium and France in 2008.

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Filed under: Earnings reports, Walt Disney (DIS), Comcast Cl’A’ (CMCSA), Verizon Communications (VZ), Technical Analysis, Stocks to Buy

SeaChange International (NASDAQ: SEAC) supplies digital server systems and software used by television and cable operators to automate the distribution and management of advertising, movies and other programming. Its ITV System allows operators to offer video on demand, pay-per-view, local ad insertions and other interactive services to subscribers, while its VODlink set-top box middleware allows cable subscribers to access a variety of interactive features. Customers include Comcast (NASDAQ: CMCSA), Verizon Communications (NYSE: VZ) and Walt Disney (NYSE: DIS).

The company surprised the Street last week, when it reported Q3 EPS of 11 cents and revenues of $49 million. Analysts had been looking for a loss of two cents and $45.2 million. In analyzing the company’s quarter, Friedman Billings was pleased with the transition to a more software-focused business model. SeaChange noted that the third quarter had benefited from software deployments with non-SeaChange VOD servers.

Continue reading SeaChange International (SEAC): Share price in bullish consolidation

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Filed under: Forecasts, Market matters, Economic data, Housing

Everybody’s been wondering when the housing market will finally hit bottom. Moody’s decided to take a stab at that question with its new extensive report, “Aftershock: Housing in the Wake of the Mortgage Meltdown.” It will cost you $3,995 to order the full report, but you can read excerpts from its Executive Summary.

While Moody’s agrees the outlook for housing is daunting, it expects as the most likely scenario that housing should bottom by early 2009. That bottom is expected to result in an average annual national house price decline of 12%. Of course, some areas will be much harder hit and parts of Florida and California are predicted to bottom out with a 30% loss from the housing price peak.

Moody’s believes the fallout from the current housing recession — yes, they do call this a recession — will be serious enough to characterize what we’re now living through as a housing crash. Anyone doubting it? Moody’s expects housing sales to hit bottom in early 2008, declining over 40% from their peak. Housing starts will reach their lowest point in mid-2008 and fall by 55% from their peak.

Continue reading Moody’s thinks house prices will bottom in early 2009

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Filed under: Major movement, Forecasts, Bad news, Options, Technical Analysis

Smith & Wesson Holding Corp. (NASDAQ: SWHC) stock is falling this morning after the company cut its outlook for the second time since late October, forecasting this morning a profit of 40 cents per share for the year ending April 30. The company had previously estimated 63 cents per share in profit. If you think this stock won’t be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on SWHC.

After hitting a one-year high of $22.80 in August, the stock hit a one-year low of $9.51 yesterday, but is well below that number today. This morning, SWHC opened at $7.02. So far today the stock has hit a low of $6.68 and a high of $7.25. As of 10:45, SWHC is trading at $7.14, down $2.78 (-27.9%). The chart for SWHC looks bearish and steady.

For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $10 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in 6 and a half months as long as SWHC is below $10 at June expiration. Smith & Wesson would have to rise by more than 40% before we would start to lose money.

SWHC has been above $10 as recently as yesterday, but has fallen sharply this morning and shown resistance around $10.10 over the past few weeks. This trade could be risky if the stock bounces back strongly, but with drops like today’s and the one in October, investors will probably be cautious with this stock for the coming months.

Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in SWHC.

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Filed under: Consumer experience, Costco Wholesale (COST), Mexico, Stocks to Buy

In today’s market, the retail space is fraught with risk. High energy prices have crimped consumers’ disposable income, and the housing slump has dented household formation — a backbone of retail sales growth. Meanwhile, sluggish job growth is sending a signal that a U.S. economic slowdown is underway.

Hence, if one is to consider a retail play, it should be a well-capitalized company, with a demonstrated business model, and Costco (NASDAQ: COST) fits that bill.

Costco helped define the ‘get it for wholesale’ space and now operates 520 warehouses, primarily in the United States and Canada. (The company operates 30 stores in Mexico via a joint venture.)

Costco’s philosophy differs from its competitors in that it focuses on a limited selection of national-brand merchandise and some private-label products. That laser focus, combined with buying direct from manufacturers and the company’s bare-bones warehouses, enables the company to operate profitably despite smaller gross margins. The Reuters F2008/F2009 EPS consensus estimates for COST are are $2.98/$3.39.

Continue reading For Costco, simplicity leads to profitability

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Filed under: Private equity

“Score one for the barbarians” — so reads the New York Post today. The reference, of course, is to Barbarians at the Gate, the sordid tale of the leveraged buyout of RJR Nabisco in the 1980s. Today, the private equity barbarians have won another battle: there will be no new tax on carried interest, at least not this year.

Charles Rangel, the House Ways and Means Committee Chairman has dropped a proposed change in the tax laws that would raise taxes on hedge fund managers. The change was relatively simple, raising the tax rate on fund profits and management fees from the current 15% to the 35% that corporations (are supposed to) pay. Needless to say, the private equity industry fiercely opposed the change, which would have raised $54 billion in new taxes.

The change in the tax code was part of a bill aimed at alleviating the effects of the Alternative Minimum Tax, which now affects 23 million households. The idea was to “fix” the AMT to keep it from being applied too broadly; the resulting loss in revenue could then be made up by increasing taxes on fund managers. But it looks like the managers are too powerful to allow that to happen, at least this time around. Hey, do you think this could have anything to do with campaign contributions and the growing political power of the newly gilded elite? Nah, couldn’t be . . .

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Filed under: Earnings reports, Technical Analysis, Stocks to Buy

Blyth Inc. (NYSE: BTH) is the largest candle maker in the United States, marketing scented and unscented candles and portable heating fuels under such brand names as Colonial Candle, Miles Kimball, PartyLite, Sterno and Handy Fuel. The firm also offers an extensive array of decorative accessories, gourmet foods and household convenience items. Products are sold through specialty retail, wholesale, catalog, Internet and home party channels.

The company pleased investors earlier in the week, when it reported Q3 EPS of 24 cents and revenues of $285.9 million. Analysts had been looking for 12 cents and $260.6 million. Management also guided FY08 EPS to $1.37-1.42 ($1.29 Street consensus).

Continue reading Blyth (BTH): Pennant formation suggests further upside

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